A Robust Measure of Core Inflation in New Zealand, 1949-96

This paper develops a stochastically-based method of measuring core inflation. The approach exploits the persistent tendency towards high kurtosis evident in the cross-sectional distribution of consumer price changes evident in New Zealand and elsewhere. High kurtosis makes the sample mean a less efficient and less robust estimator of the population, or underlying, mean price change than is an order statistic such as the median. The quarterly cross-sectional distribution of price changes in New Zealand over the 1949-96 period also exhibits chronic right skewness. This tends to bias a median measure of inflation downwards relative to the population mean. It is found that a slightly higher percentile of the price change distribution reliably corrects for the asymmetry of the distribution, while maintaining its efficiency and robustness relative to the sample mean as an estimator of the population mean. This percentile of the distribution which corresponds on average to the mean, filters out the effects on the mean of relative price shocks, and is interpreted as a measure of core inflation. Testing of the measure, and of the differential with the mean, suggests that the price movements being filtered out do primarily reflect supply shocks having only a temporary impact on inflation. The measure offers clear advantages over current approaches in terms of transparency and verifiability, and is also much better-suited to the filtering of supply shocks not directly affecting clearly identifiable components of the CPI in a readily measured way.